Wireless carriers reshape business to cash in on fast-growing M2M segment

Global M2M connections will rise to an estimated 375 million in 2017 and the revenue generated by wireless carriers will more than double in that time span.

IHS Inc.

11/15/2013

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Amid a slowdown in their core business of cellphone-based communications, wireless carriers are restructuring to capitalize on the booming market for machine-to-machine (M2M) cellular service.

The number of cellular M2M connections will more than triple by the end of 2017, according to a new white paper entitled “MNO Strategies in the Cellular M2M Market” from IHS Inc. (NYSE: IHS). Global connections will rise to 375 million in 2017, up from 116 million in 2012. In parallel with the rise of connections, revenue generated by cellular M2M services from wireless carriers will explode during the coming years, rising to $22.4 billion in 2016, up from $9.6 billion in 2012.

The attached figure presents the IHS forecast of global revenue for cellular M2M services, an area consisting of connectivity, value-added service (VAS) management and M2M application platform services (MAPs).

The rise of M2M comes at a time when the traditional cellphone-based mobile services market is becoming increasingly mature and saturated, with growth slowing particularly in the developed markets like the United States and Western Europe.

“Wireless service providers ranging from Verizon Wireless, to Vodafone, to China Mobile are turning to the cellular M2M market as a new, high-growth market opportunity,” said Sam Lucero, senior principal analyst for M2M & the Internet of Things at IHS “However, to take full advantage of the M2M’s market’s potential, the wireless firms must deliver their customers much more than simple cellular connectivity. Instead these companies must offer a full suite of VAS and MAP services, prompting them to establish their own M2M business units and develop or acquire M2M connection platforms.”

Taking care of business

Many MNOs have established M2M business units as they have expanded their market strategies beyond simply providing wholesale connectivity to mobile virtual network operators (MVNOs) and other aggregators. Examples include Sprint’s Emerging Solutions Group and Telekom Austria’s Telekom Austria Group M2M GmbH unit.

The M2M business unit strategy allows wireless carriers to develop specialized expertise in both horizontal M2M business issues—such as connectivity management—as well as vertical-specific domain expertise. Application complexity is a key feature of many M2M vertical markets. Wireless carriers are finding that they can engage more effectively with application developers, service providers, and corporate adopters when they have in-depth expertise in the technical and business issues facing their partners and customers.

Business unit staff members also can act as M2M champions within the larger wireless organization, and this role has been integral in increasing support for M2M market involvement among the broader base of senior operator executives and leaders. Likewise, M2M business unit staff members at wireless carriers have played an important role in evangelizing M2M to the investor community and educating the investor community about the business dynamics specific to the market.

Getting on the platform

In parallel with the establishment of M2M-specific business units, wireless carriers are deploying M2M Connection Platforms (MCP) to tailor the operators’ infrastructure and systems to the needs of the M2M market. MCPs are required because of the major departure that M2M represents compared to established cellphone-based services.

Traditional systems and processes by carriers are oriented toward serving mobile handset service subscribers. These systems are designed for single-device activation processes. They also work with cellphones and other consumer devices that are in the possession of their users in the event of technical difficulties.

Furthermore, they operate based on 18- to 24-month replacement/upgrade cycles, reducing the need for backward compatibility of network infrastructure with still-deployed legacy devices. The use cases also are relatively simple, based on communication and content. Finally, traditional cellular services have high average revenue per user (ARPU), particularly for smartphones, which normally amounts to more than $80 per subscriber per month.

In contrast, M2M services more typically consist of devices that are remotely deployed in bulk, sometimes in very large volumes. M2M devices also are remotely deployed, requiring an expensive “truck roll” service call if there are technical difficulties in the field.

Moreover, M2M devices have long expected deployment times in the field, ranging up to 15 years or more.

These devices and services also often have complex use cases, requiring a strong understanding of vertical-specific business and technology issues. Finally, they have a low ARPU per device, typically at less than $5 per connection per month.

Consequently, wireless carriers are deploying related platforms—the MCPs—that generally provide for automated remote bulk provisioning of devices directly by the customer, as well as remote trouble-shooting, management of the connection directly by the customer and integration of MCP functionality into the customer’s existing enterprise management systems via application programming interfaces (APIs).

Such features benefit the MNOs by enabling automation, and thereby lowering the costs, of many functions related to the management of M2M connections. At the same time, these features benefit customers by giving them greater control over the connections to their fleet of remotely deployed devices.

While it is important to note that M2M services have been implemented using traditional telecom systems, it is unlikely that such services could become an offering by a mainstream wireless carrier without M2M-tailored MCP.